Better Together: The Costs of an Independent Scotland

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In just a few short weeks Scotland will vote in a referendum as to whether they should leave the United Kingdom and become their own independent country. If Scots vote yes, it would end the 307 year-old union between Scotland and England as plans for independence would be laid out and debated with the U.K. While polls currently show the ‘Better Together’ movement with a slight lead, the ‘Yes’ campaign have been extremely vocal in their rallying of support for independence. In the end it could come within as narrow a margin as Quebec’s own 1995 referendum on leaving Canada. However, with the prosperity of Scotland at stake Scottish citizens and voters should think seriously about the ramifications of dissolving the U.K. as it has been known for over 300 years.

For most Scots, the question of independence will lie heavily on the economic future of Scotland. Alex Salmond, First Minister of Scotland and a former oil economist, claims that Scots will be at least £1,000 better off per head if they become an independent nation, though many economists reject this claim and unionists instead assert that Scots could be up to £1,400 better off per year should they choose to stay in the United Kingdom. In reality, these figures are little more than political rhetoric as the figures are based on enormous uncertainties. Chief among these is the future of Scotland’s oil business.

North Sea oil has generated billions of pounds worth of tax revenue for Great Britain, but Scottish nationalists claim both that the oil is Scottish and that the rest of the U.K. is stealing their resources, as well as mismanaging the profits from the oil industry. Many nationalists assert that Scotland could model such prosperous countries as Norway if they were able to maintain national control of their oil revenues and thus they could create an oil trust fund that would ensure a nest egg of money to spend on infrastructure and social programs. Even closer to home, nationalists look to the Shetland Isles, who for decades have invested oil revenues into local public projects. However, there remains a debate about how effective such a trust would be if it were implemented today, as the North Sea’s easy-to-access oil deposits have largely been pumped dry. Sir Ian Wood, a Scottish oil tycoon, asserts that the nationalists have exaggerated the amount of oil that there is left by almost 10 billion barrels. Thus whatever oil revenue Scotland would collect over the next few decades, total revenue is almost certain to slowly decline as the remaining oil is retrieved by expensive procedures from difficult-to-reach locations.

Other large economic questions in the independence debate include what currency an independent Scotland would use, and how much borrowing would cost for the newly independent nation. As all three of the U.K.’s major political parties have said they would not allow Scotland to share the pound should it become independent, a currency union between Britain and Scotland seems unlikely unless Scots are willing to accept harsh restrictions which the U.K. would almost inevitably ask for as the richer of the two nations. Scotland has also considered joining the Eurozone, though the Euro’s current troubles make this a discouraging choice. Perhaps more likely is that Scotland would use the pound without approval from England or even form their own currency, which would almost certainly be valued lower than the British pound, making imports from the rest of the U.K. more expensive. Many have also suggested that there would be substantial transaction costs as over 2/3 of Scottish trade is with the rest of Great Britain, though in actuality Scotland’s economy would probably not suffer massively from this in the long run, similar to Canada’s trade relations with its larger and richer neighbor to the south.

A larger problem would be Scotland’s borrowing rates and national debt if they were to become independent. PIMCO, one of the world’s largest investment firms, estimates that an independent Scotland would pay between 0.5 – 1 percentage point more on debt than the U.K. does at the moment. This is largely because Scotland lacks the credit history other economic players like America or Britain have built up over the years. Additionally, any independence deal with Britain would certainly include Scotland taking on their share of the union’s debt, which if distributed by population would total at least £130 billion in 2016/17. All this being said, doomsday predictions that Scotland would be the next Greece should it become independent are completely ungrounded, as its debt-to-GDP ratio would be about 75% at the time of independence – which is still better than the rest of the U.K. The only way Scotland would encounter huge fiscal troubles would be if they continue toward the Scandinavian-style social programs they seem to want without increasing revenues.

Clearly economics is not the only factor when people vote for independence. Last March I got the chance to travel around Scotland, and from Glasgow to Edinburgh what I overwhelmingly noticed was the national pride so many Scots held dearly, and that they largely see themselves as culturally distinct from the rest of Great Britain. A nationalist call for greater political freedom is certainly a sympathetic argument, yet Scotland has achieved greater political autonomy in the past whilst remaining in the union and reaping the associated benefits. In fact all three major British parties have proposed plans for greater Scottish self-government, the Tories shocked many by suggesting the regional Scottish government should even have control over income taxes. Furthermore, Scotland’s political agenda has a better chance of being acknowledged on the world stage if they are part of a strong United Kingdom. The many Scots who support nuclear disarmament will have greater influence if their country sits on the UN Security Council as the U.K. does, and whether they like it or not an independent Scotland would lack global influence in both economics and politics.

What is of paramount importance to Scots as they go to the polls on September 18th is that they think through their decision carefully. If Scotland votes for independence there will be a number of irreversible costs, including a potential capital flight if businesses relocate to Britain, a loss of international influence, an increased debt burden, and higher borrowing costs. For these reasons I support Scotland remaining a part of the United Kingdom. In the end Scotland’s future lies in the hands of the Scots, and if they see independence worth these associated costs then the world must respect their decision.

About Michael Swistara

Michael graduated from McGill University in 2015 with a double major in political science and economics, and currently attends Columbia University where he is pursuing a master's degree. As former Editor-in-Chief of the Political Bouillon, Michael continues to occasionally contribute articles on his favorite topics, including American politics, economic policy, and foreign affairs.